Did Bill Dudley Just Unveil The Fed's Real Taper "Scapegoat" Plan?

Tyler Durden's picture

That the Fed has a problem is increasingly well known - despite the blather from the mainstream media that QE monetization can continue ad infinitum. Their problem, of course, is running out of government-provided liabilities to monetize (as deficits shrink and their ownership of the entire Treasury complex surges). They face other problems (as we have noted before) but the admission that they are boxed in would have major ramifications in the market's faith. So, how does the Fed, faced with the knowledge that they have created asset bubbles, broken the bond market, and are boxed in by their own excess still meet the market's undying desire to keep the flow going? Bill Dudley just, perhaps inadvertently, dropped a hint of the next 'market/scapegoat' for monetization - Student loans.

Bear in mind that the "taper" is all about economic cover for a forced move the Fed has to make, because:

1. Deficits are shrinking and the Fed has less and less room for its buying


2. Under the surface, various non-mainstream technicalities are breaking in the markets due to the size of the Fed's position (repo markets, bond specialness, and fail-to-delivers among them).


3. Sentiment is critical; if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government's debt (which it clearly is), then the game accelerates away from them very quickly - and we suspect they fear we are close to that tipping point


4. The rest of the world is not happy. As Canada just noted, the US monetary policy will be discussed at the G-20

Simply put, they are cornered and need to Taper; no matter how bad the macro data and we are sure 'trends' and longer-term horizons will come to their rescue in defending the prime dealers' clear agreement that it is time...


So they need a scapegoat!


Yes - Mr. Dudley - Very Very Rapid indeed...

As we recently noted, student and car loans are responsible for 99% of all consumer credit created this year.

Thank you Uncle Sam for making yet another generation of indentured servants who are studying geology on the taxpayers' dime, who will never get a job, who are up to their neck in debt, but at least can afford a Chevy Silverado.


And while the Fed itself is responsible for the $1trillion bubble that has grown in easy cheap student loan debt...

as the NY Fed disclosed moments ago, federal student loans officially crossed the $1 trillion level for the first time ever. Notably: the quarterly student loan balance has increased every quarter without fail for the past 10 years!


It would appear Mr. Dudley is getting the joke that a younger generation burdened with debt is a problem...



and, as we notd here,  the delinquency rate on student loans is soaring and has just hit an all time high of 11.83%, an increase of almost 1% compared to last quarter. Even according to just the government lax definition of delinquency, a whopping $120 billion in student loans will be discharged. Thank you Uncle Sam for your epically lax lending standards in a world in which it is increasingly becoming probably that up to all of the loans will end up in deliquency.



and furthermore, as we noted here, of the 28 million Americans with federal student loans, 60%, or 17 million, don't pay the US government a single cent!

Hopefully this highlights just how acute the severity of the student loan bubble is when stripped of all spin and mitigating rhetoric.


So where does that leave us?

1. The Fed knows it needs to taper at some point - no matter what the rhetoric, unless the Fed admits the US is still in crisis mode, it risks losing its credibilit entirely (and control of the bond market) if it does not taper.

2. Smaller deficits mean the Fed is boxed in with its ability to monetize Treasuries and keep the "flow" flowing...


How to escape that box?

1. Identify a bubble (but it cannot be an asset-bubble because if it were then the collateral chains and rehypothecation would contagiously collapse every other asset class).

2. Scapegoat that 'Bubble' as potentially a headwind for growth that needs to helped by government intervention.

3. "Help" the people by monetizing that bubble (and implicitly keeping the "flow" flowing)


The Answer - as Bill Dudley just opined - is Student Loans.

1. A perfect bubble (forget about who created it) that needs to be popped by a responsible overseer

2. Lots of debt to monetize (keep the "flow" flowing)

3. A perfect excuse to slow Treasury buying (economy stabilizing, jobs stabilizing, stocks doing well)

4. A voter-friendly way of "helping" those in need that does nothing but enable more flow.


How will they monetize Student Loans? No one is sure yet, but Dudley's comments on Human Capital


make one think of the book "The Unincorporated Man"


The Bottom Line - Bill Dudley just floated a strawman that the Fed will taper Treasuries and the scapegoat will be Student Loans - which they will directly monetize to save us all from ourselves (and the problem they created).


(as an addenda - we warn of the unintended consequence of this action - should they do it - that will merely encourage banks to securitize student loans and flip them to the government en masse, creating demand for moar student loans and enabling supply - ths growing the bubble ever larger).

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
chump666's picture


lol...those poor f*ckers are running out of ideas here.


ghengis86's picture

I got an idea; bundle skyrocketing insurance plans generated by the ACA, securitize, rate it AAA Prime, sell to the Fed and short the shit out of the steaming pile.

"I came in for my heart procedure today, approved and covered by my ACA mandated Fool's-Gold plan."

"The doctor will see you - wait a minute...Annnnnddd, it's gone! Thank you, next patient please!"

Ham-bone's picture
Treasury debt and WTF is going on??? Is it in the self interest of "foreign" nations to buy record % and total US Treasury debt positions?  In a currency that is clearly being monetized (diluted)?  If not, why do this? There are some options around the $5 T in foreign ownership: option 1) - foreigners don't own some or all of the debt the debt is simply ascribed to foreign nations by the US financial stewards that do hold them*...but then where does the "money" they use to buy them with come from?  Who really owns them?  The ESF or god knows what machinations?  This would seem to imply that the US is in part or entirely monetizing it's debt via the "foreign" category of debt holders... * The data in this table (TIC) are collected primarily from U.S.-based custodians. Since U.S. securities held in overseas custody accounts may not be attributed to the actual owners, the data may not provide a precise accounting of individual country ownership of Treasury securities (see TIC FAQ #7 at: 
option 2) - foreigners do own the debt US runs a trade deficit of $500 B and budget deficit of $700 B this year...means an excess of $500 B that must be recycled into something and $700 B new debt that must be created to pay (on the credit card) for what we do but don't want to tax ourselves for.  Discrepancy in these in '08 when our trade deficit collapsed to $300 B and budget deficit inflated up to $1.7 T (lots of debt to be purchased and little excess dollars to buy it up) but this is when "foreigners" took on the greatest amount of Treasury debt.  How?  Currency swaps?  QE?  God knows but (according to TIC) they increased their ownership from less than $900 B in '00 to $2.2 T in '08 to in excess of $5 T in '13.  Coupla ?'s if foreigners do own 50%+ of US med/long term debt...   -Wouldn't they be most hurt by a tapering? -"Logically", wouldn't it be in foreigners self interest to sell Treasury's before a tapering to avoid taking these losses?  If they did sell into a Fed tapering...well, what would that look like absent the Fed's QE??? -Given domestic ownership of Treasury's has remained @ $2.5 T since '00 (ex Fed), at what rate would institutional money need to sell off assets to buy up new and rollover debt...and at what rates to replace QE and Foreign $ s?...and at what impact on equity or property markets? -Wouldn't any interest rate spike send most interest payments to foreigners (external of the US further economy) depressing money velocity/ money multipliers and worsening budge deficits? None of this really makes any sense...anybody have any thoughts that do make sense???
fonzannoon's picture

Ham-bone don't sweat the treasury debt. Foreigners are not dumping and the fed is not concerned that it has to taper. Maybe muni's become the next thing monetized, maybe student loans. Maybe both. But the fed will continue what they are doing.

Everybodys All American's picture

What will be the interest rate on the ten yr when they own the entire lot?

SilverIsKing's picture

Do other countries publish their ownership of US debt? What we see is from the US Govt. The accuracy is suspect at best.

markmotive's picture

As the Fed extends beyond anyone's wildest prediction, the market may turn from euphoria to fear. Remember 2008?


Raymond K Hessel's picture

When Goldman Sachs changed the name of the Personnel Dept to the Human Capital Dept, I knew I was living during the end of days.

aVileRat's picture

Well at least we now know the answer to the question on who is buying deep discounted (inventory pushing) GM's and 5 toilets at Home Depot.


chump666's picture

Fonz, the Fed is underwriting the current massive bond bubble from corp debt through to rental cash bonds now (kid you not!).  This is the academics, or geniuses, what ever you want to call them solution to maintain a liquidly load that Wall Street manages.  And Wall Street is just to smart and on the ball to make a meal of it all (sarc).  The Fed won't taper anything, if they do the bond bubble could blow up.  The Fed is playing their market 'we may-taper we may-not taper' bs also I would be more concerned with China and of course Japan.  imo those two countries are the most dangerous economically on the planet.  Asia will set off the next crisis.

fonzannoon's picture

Chump there are two things I have come to believe in with absolute certainty. The fed is never, ever going to reverse course, and when they are done there won't be a treasury market. The plan from the beginning was to buy it all and eliminate it.

chump666's picture

That's true and I'll add if we do enter into a global war, and it's coming, the Fed will 100% buy up the whole debt market.  Japan is very close to owning their whole market, I think they are give and take 10% out from monetizing the whole thing.  I will say this much, it's actually heartbreaking that we allowed our system, as fraught as it was, to be taken over by central banks that are going to/have caused so much pain.



fonzannoon's picture

The most difficult part of this is understanding where this is going and at the same time being forced to watch it play out while everyone around you keeps rationalizing it. It can drive you batshit crazy, and sooner or later, drive you into insolvency.

Ham-bone's picture

Fonz - my point with all the Treasury shit is how patently wrong, simply ludicrous this whole "taper" is (and I was a liberal arts major/ imagine what a BS could do)...and yet somehow it's accepted as the eventual outcome...All I can guess is we are near the end of this charade because when the lies and propaganda are so easily proven wrong...not sure how long this can be hidden???

fonzannoon's picture

it's accepted as the eventual outcome by the msm and apparently here sometimes. At some point in the next year or so Yellen will allude to the fed as having considered the implications of continuing the purchases until the fed is the predominant owner of the treasury market. Santelli will have an anuresym (not sure i spelled that right) on air and be carried off in a stretcher while Liesman explains the positives of the scenario.


Ham-bone's picture

I'm throwing shit up again and again because I'm waiting for somebody to show me how I don't get it...how in some way this actually works...instead I get mantras and dogma and normalcy bias but no mathematical refutation...seems our system is so bought and paid for that no one that isn't terribly annoying (Schiff) can simply show how ridiculous these assumptions are and the resulting economic destruction. 

These Fed prez are simply lying through their teeth...tapering and pulling away due to strong economics on the ground?!?  They know soooo much better.  Seriously criminal what games these people are playing but seems no more ramifications for them than for the US for floating funny money.

VD's picture

if Fed insane enough to create student debt jubilee, then every motherfucker needs to matriculate asap and spend that $$$ asap!

resurger's picture

John Paulson says hes in... lol

ghengis86's picture

Call it Obacus. Only need to change one letter and use the same sell sheets.

ZH Snob's picture

the insolvent students (or ex students) should organize a class action suit against the entire student loan scam industry.  include the bankers, the fed and the college admissions.  they could claim they were unfairly entrapped by a system that knew very well there would be no jobs available once they graduated, that these entities were systematically processing the student sheep for the slaughter.  it would be great to see all these bloodsuckers called to the stand, one by one to answer to their greed.

booboo's picture

Or as it was known in 1930's Germany "cannon Fodder for the Fatherland"

doctor10's picture

They know if they can's keep the youngun's shackled to debt they're more likely to show up in DC demanding to know what's goin' on-and may even learn about their 2nd amnedment right in the process.  so ladle on the debt

yogibear's picture

Dudley, Evans, Williams and the rest won't stop until their forced to by a currency crisis.

SuperRay's picture

Instead of sitting on your asses and thinking of snarky comments to make - DO SOMETHING!

Now is the time to ACT.  Two thousand architects and engineers have agreed that all three towers were brought down by Controlled Demolition on 9/11.  Support them! Take action with them!  It's all tied together, and the dumbass american public is on the verge of actually waking up to the bullshit.  DO IT!




bnbdnb's picture

Where is the student loan ETF?

bnbdnb's picture

Well kind of...but can the fed monetize student loan debt?

CClarity's picture

If they can buy Mortgage-backed securities, why not Student-Loan-backed securites, car-loan backed securities, Municipal Bonds, corporate bonds.  Anything with an interest rate so they can continue to keep ZIRP and QE foh-evah!

Remember, just a few years ago it was "unthinkable" that the Fed would buy Federal Agencies or MBS securities and now? I suppose it could be payday loans next.

disabledvet's picture

so Sallie Mae gets..."put in conservatorship" is it?...this time, those debts are "high powered money" however. that stuff has to be repaid or it comes out of your paycheck directly. interesting that the revolvers are spiking. could be the "house flipping" craze is peaking. everything else looks pretty good though. i still wouldn't be shorting treasuries because it sure looks like full blown currency wars are on the doorstep here. it would be ironic if a massive revaluation of the yuan is what precipitates the whole thing. again "gold got slammed" which if China were all "hunky dorry" would seem the opposite of what to expect given the dollar/yuan exchange rate.

knukles's picture

Hah ha ha ha ha ha ha
What's a law, Daddy?

Murf_DaSurf's picture



Better Short my Penn State

alien-IQ's picture

what can possibly go wrong.....?

Occident Mortal's picture

Plot a chart showing

Left axis - Real US Budget Balance (Tex Revenue - Spending)

Right axis - Fed Fund Rate

The fit is incredible. When the deficit is big, rates are low and vice versa. Guess which one leads the way?

And who says the Fed is independent? Bullshit.

Murf_DaSurf's picture



Please, no abstract thinking requests after 6 PM, didn't you see the sign on the way in?

resurger's picture

no shit captain!

YC2's picture

If those fucks are on the other end of my student loan I am cutting the goddamn cord and walking off into the everglades

uncle.bigs's picture

The Fed is pleased as punch that student loan debt is skyrocketing.  It's one of the only categories of debt that is growing and it's propping up the economy.  They have no notion to stop that growth.  There is also no evidence that a small taper would impact student loan growth at all.  Come on, Man!

Colonel Klink's picture

If you drill down further you'll find it's not only young people piling up the debt.  There are quite a number of middle aged people who have returned back to school in hopes of finding a job in another field away from segments which will never return.  They're also using it for living expenses because they can't find a job.  Trying to keep their head above water for another day.

Bangin7GramRocks's picture

You know what the world needs more of..........MBA's!

buzzsaw99's picture

We know who the fuck they plan on buying them from too. All in the guise of helping da yutes. How convenient. Bonus time again bitchez.

Big Ben's picture

I'll believe in taper when I see it. In the short term, the Fed is more likely to expand QE than to taper it.

buzzsaw99's picture

This has nothing to do with tapering and everything to do with anti-tapering.

YC2's picture

seems to me more like the suggestion of a shift in composition where the treasury taper and student loan monetization net out.



buzzsaw99's picture

They might pound the Sallie to treasury spread down to zero but it wouldn't take jack shit to make that happen. Treasury rates going up and sallie bonds being bought by the fed means no spread at all in which case the fed would have to buy them all because investors would dump for Ts, which they will to avoid the headache of collecting the deadbeat portion from the deadbeat usa gubbermint if there were no premium. The fed will simultaneously INCREASE treasury buying as well as begin Sallie bond buying (from jamie the gangsta of course). Mark my words.

YC2's picture

very good points.  thx

lotsoffun's picture

dudley is the most out of touch of all of them.  he is real goldmine partner status, probably richer than all hell, much more than the poor pure academics like bennie boy.  and i promise you one thing.  think about this. 20+ years in the goldmine.  who are his friends, mentors and peers?  when he goes to dinner, who does he go with?  when he has a question, who does he talk to?    sheila bair?  brian moynihan?  no - lloyd.  and lloyd tells him what to do.  because he's a shill.  he was 'chief economist' at goldmine and that screams on thing - shill. 

 i think it's a yiddish term actually.  what a surprise.


 he says one thing and goldmine bets the other way and that goes back to the late 1980's.

According to salary figures released in 2010, Dudley is paid "more than $410,000 per year", making him one of the two highest-paid of the twelve presidents of the Federal Reserve Banks.[7]



Bay of Pigs's picture

The William Dudley, "out of touch". Hardly. He is front and center, not only at the NY FED, but at the BIS. Blankfein probably takes his orders from this guy, not the other way around. The Central Banker of all Central Banks.

"In 2012, Mr. Dudley was appointed chairman of the Committee on the Global Financial System of the Bank for International Settlements (BIS). Previously, Mr. Dudley served as chairman of the Committee on Payment and Settlement Systems of the BIS from 2009 to 2012. He is a member of the board of directors of the BIS and a vice chairman of the Economic Club of New York."



lotsoffun's picture

mr. bay of pigs - maybe.  but it's pretty simple.  dudley makes $500,000/year and lloyd boy make $35,000,000.  just that simple.  really is.   dudley wants the 35 million, believe me.  he couldn't cut it.  he did the best for himself that he could.

it's not the same as bernake.  bernake never did wall street, he sees himself as better than that.  he settles for the 500k.  dudley was in the game competing for the top job.